Shorter-dated JGBs inch up, 2-yr sale eyed

TOKYO, Oct 28 - Shorter-dated Japanese government bonds inched up on Wednesday, with futures coming off a two-month low, buoyed by measured optimism towards a two-year debt auction and the previous day's bounce by U.S. Treasuries.

* The market awaited results of a 2.4 trillion yen ($26.2 billion) 0.3 percent coupon two-year JGB auction at 12:45 p.m. (0345 GMT) for immediate cues.

* Market players are keen to see if regular demand from cash-rich domestic banks will emerge at a time when the market is bracing for JGB issuance to be increased this fiscal year. An increase is expected as the government needs to offset a tax revenue shortfall and to make up for weak JGB demand among retail investors.

* Monthly issuance of two-year bonds could be increased from the current 2.4 trillion yen if the government decides to sell more bonds.

"A decent auction is expected as two-year yields are back at levels last seen in August, which means they offer better returns," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley. "Much of the recent supply concerns have been factored in."

* The two-year yield dipped 1 basis point to 0.265 percent. The yield had touched a four-year low of 0.200 percent in September before bouncing to a near four-month high of 0.285 percent on Monday.

* The five-year yield fell 0.5 basis point to 0.690 percent.

* Traders were still slightly nervous, wary of demand again peaking prematurely as was the case for the past two JGB auctions this month.

* The two most recent JGB auctions -- a 20-year sale and a five-year tender -- were met with lukewarm demand as the market has been dogged by concerns over a possible supply increase.

* The benchmark 10-year yield edged up 0.5 basis point to 1.405 percent, matching a 2-½ month high hit on Tuesday.

* December 10-year futures dipped 0.2 point to 137.84 after hitting a two-month low of 138.81.

* U.S. Treasuries rose on Tuesday following strong demand for new two-year U.S. notes, part of this week's record $123 billion supply of government bonds. ($1=91.63 Yen)